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News Release

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Covidien Reports First-Quarter Results

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  • Net sales up 5%; Medical Devices sales up 6%
  • First-quarter diluted GAAP earnings per share from continuing operations were $1.02; excluding specified items, adjusted diluted earnings per share from continuing operations were $1.13, up 19%
  • Fiscal 2012 sales guidance updated

DUBLIN--(BUSINESS WIRE)--Jan. 26, 2012-- Covidien plc (NYSE: COV) today reported results for the first quarter of fiscal 2012 (October-December 2011). First-quarter net sales of $2.90 billion increased 5% from the $2.77 billion reported a year ago. Foreign exchange rate movement had no impact on the quarterly sales growth rate.

First-quarter 2012 gross margin of 58.7% rose 2.0 percentage points from the 56.7% of the prior-year period. On an adjusted basis, first-quarter 2012 gross margin of 58.8% was at a record quarterly level, 1.2 percentage points above that of a year ago. This improvement reflected manufacturing cost reduction, benefits from our restructuring programs, favorable foreign exchange and positive business mix.

Selling, general and administrative expenses for the first quarter of 2012 were above those of the comparable quarter of the year before. This was due to higher legal charges and to spending on growth initiatives, primarily to expand the Company’s sales and marketing presence in emerging markets. Research and Development (R&D) expense in the first quarter climbed 21% and represented 5.0% of net sales, versus 4.3% of sales in the year-ago period.

In the first quarter of 2012, the Company reported operating income of $636 million, versus $549 million in the same period the year before. First-quarter 2012 adjusted operating income, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, was $705 million, compared with $615 million in the previous year. First-quarter 2012 adjusted operating income, excluding the specified items, represented 24.3% of sales, versus 22.2% a year ago.

The first-quarter 2012 effective tax rate was 16.7%, versus an effective tax rate of 16.1% in the first quarter of 2011. The first-quarter 2012 adjusted tax rate, excluding specified items, was 17.4%, versus 18.4% in the first quarter a year earlier.

Diluted GAAP earnings per share from continuing operations were $1.02 in the first quarter of 2012, versus $0.87 per share in the comparable quarter last year. First-quarter 2012 adjusted diluted earnings per share, excluding specified items, were $1.13, versus $0.95 a year ago, a 19% increase.

“We are off to an excellent start in fiscal 2012, with good sales gains, record gross and operating margins and double-digit EPS growth,” said José E. Almeida, President and CEO. “This strong performance was again led by our largest business segment, Medical Devices, which delivered growth fueled by double-digit advances in Energy and Vascular products.

“During the first quarter, we also significantly increased R&D spending and continued to invest in our emerging markets, where sales again climbed at a double-digit pace,” Mr. Almeida said. “Looking forward, although we face some pressure on our reported results due to the recent strengthening of the U.S. dollar, we remain comfortable with the current annual consensus EPS estimates for 2012. We expect that our broad product portfolio, robust pipeline of new products and ongoing strategic investments funded by our strong cash flow will drive superior operational results for the remainder of 2012 and beyond.”

BUSINESS SEGMENT RESULTS

Medical Devices sales of $1.98 billion in the first quarter were 6% higher than the $1.88 billion in the comparable quarter of last year. Growth was driven by new products and increased volume. First-quarter sales in Endomechanical rose above those of the prior year, fueled by a good growth for stapling products, paced by our innovative Tri-Staple™ reloads. In Soft Tissue Repair, sales were slightly below those of a year ago, as an increase for sutures was more than offset by a decline for mechanical fixation and mesh products. Energy registered another strong double-digit quarterly sales gain, largely due to the continuation of exceptional growth in sales of vessel sealing products. In the Oximetry & Monitoring product line, growth was primarily attributable to higher sales of monitors. In Airway & Ventilation, sales were below those of the year before, as an increase in airway products was overshadowed by lower sales of ventilators. Vascular products posted sales well above those of the previous year, paced by double-digit increases for neurovascular and venous insufficiency products.

Pharmaceuticals sales of $490 million in the first quarter were up 4% from last year’s first-quarter sales of $470 million. Sales of Specialty Pharmaceuticals were slightly above those of a year ago, due to favorable generic pricing and growth for the EXALGO® and PENNSAID® products. Sales of Active Pharmaceutical Ingredients climbed 21%, driven by a sharp gain in narcotics, largely the result of customer order timing. Higher sales in Contrast Products reflected a one-time customer order and increased sales outside the United States. Sales of Radiopharmaceuticals were somewhat below those of the prior year, as higher generator sales were more than offset by lower sales of thallium and other products.

On December 15, 2011, the Company announced that it plans to spin off its pharmaceuticals business into a standalone public company. It anticipates that the transaction will be in the form of a distribution that will be tax-free to U.S. shareholders of a new publicly traded stock in the new pharmaceuticals company. Covidien currently expects that completion of the transaction could take up to 18 months. Earlier this month, the Company announced the appointment of Mark Trudeau as president of its Pharmaceuticals segment and a senior vice president of the Company, effective February 1. A 25-year pharmaceuticals industry veteran, Trudeau is president and chief executive officer of Bayer Healthcare, LLC.

Medical Supplies first-quarter sales of $424 million were virtually unchanged from the $422 million reported in the comparable quarter of 2011, as increased sales of Nursing Care and Medical Surgical products countered decreases for SharpSafety and OEM products.

FISCAL 2012 OUTLOOK

Covidien has updated its fiscal 2012 guidance, originally issued in September 2011, to reflect the strengthening of the dollar versus most currencies, coupled with better operating revenue growth than previously anticipated. The Company now estimates that net sales in fiscal 2012 will be up 1% to 3%, including foreign exchange at current rates. This compares with prior guidance of a 3% to 5% sales increase in 2012. Net sales are now expected to be up 2% to 5% versus 2011 in the Medical Devices segment, up 1% to 4% in the Pharmaceuticals segment and down 2% to flat in the Medical Supplies segment. On an operational basis, excluding the impact of foreign exchange, Covidien now estimates that total Company sales will increase 3% to 5% in fiscal 2012, about one percentage point above its prior guidance.

There is no change to the Company’s guidance for operating margin, which remains at 22% to 23%, or for effective tax rate, which remains at 17% to 18%. Both operating margin and tax rate guidance exclude one-time items. There is also no change to the Company’s guidance of $1.9 billion or higher for free cash flow (net cash provided by continuing operating activities less capital expenditures), excluding any legacy tax payments.

ABOUT COVIDIEN

Covidien is a leading global healthcare products company that creates innovative medical solutions for better patient outcomes and delivers value through clinical leadership and excellence. Covidien manufactures, distributes and services a diverse range of industry-leading product lines in three segments: Medical Devices, Pharmaceuticals and Medical Supplies. With 2011 revenue of $11.6 billion, Covidien has 41,000 employees worldwide in more than 65 countries, and its products are sold in over 140 countries. Please visit http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.covidien.com&esheet=50144984&lan=en-US&anchor=www.covidien.com&index=1&md5=0e6e480fc700e7f47404927fada486ab to learn more about our business.

CONFERENCE CALL AND WEBCAST

The Company will hold a conference call for investors today, beginning at 8:30 a.m. ET. This call can be accessed three ways:

NON-GAAP FINANCIAL MEASURES

This press release contains financial measures, including operational growth, adjusted gross margin, adjusted operating income, adjusted earnings per share, adjusted operating margin and free cash flow, which are considered “non-GAAP” financial measures under applicable Securities & Exchange Commission rules and regulations.

These non-GAAP financial measures should be considered supplemental to and not a substitute for financial information prepared in accordance with generally accepted accounting principles. The Company’s definition of these non-GAAP measures may differ from similarly titled measures used by others. The Company defines free cash flow as net cash provided by continuing operating activities less capital expenditures.

The non-GAAP financial measures used in this press release adjust for specified items that can be highly variable or difficult to predict. The Company generally uses these non-GAAP financial measures to facilitate management’s financial and operational decision-making, including evaluation of Covidien’s historical operating results, comparison to competitors’ operating results and determination of management incentive compensation. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations that, when viewed with GAAP results and the reconciliations to corresponding GAAP financial measures, may provide a more complete understanding of factors and trends affecting Covidien's business.

Because non-GAAP financial measures exclude the effect of items that will increase or decrease the Company’s reported results of operations, management strongly encourages investors to review the Company’s consolidated financial statements and publicly filed reports in their entirety. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is included in the tables accompanying this release.

FORWARD-LOOKING STATEMENTS

Any statements contained in this communication that do not describe historical facts may constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein are based on our management's current beliefs and expectations, but are subject to a number of risks, uncertainties and changes in circumstances, which may cause actual results or Company actions to differ materially from what is expressed or implied by these statements. The factors that could cause actual future results to differ materially from current expectations include, but are not limited to, our ability to effectively introduce and market new products or keep pace with advances in technology, the reimbursement practices of a small number of large public and private insurers, cost-containment efforts of customers, purchasing groups, third-party payors and governmental organizations, intellectual property rights disputes, complex and costly regulation, including healthcare fraud and abuse regulations and the Foreign Corrupt Practices Act, manufacturing or supply chain problems or disruptions, rising commodity costs, recalls or safety alerts and negative publicity relating to Covidien or its products, product liability losses and other litigation liability, divestitures of some of our businesses or product lines, our ability to execute strategic acquisitions of, investments in or alliances with other companies and businesses, competition, risks associated with doing business outside of the United States, foreign currency exchange rates and environmental remediation costs. These and other factors are identified and described in more detail in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, and in subsequent filings with the SEC. We disclaim any obligation to update these forward-looking statements other than as required by law.

               
 
Covidien plc
Consolidated Statements of Income
Quarters Ended December 30, 2011 and December 24, 2010
(dollars in millions, except per share data)
 
 
Quarter Ended
December 30, 2011

Percent of
Net Sales

Quarter Ended
December 24, 2010
Percent of
Net Sales
 
Net sales $ 2,898 100.0 % $ 2,769 100.0 %
Cost of goods sold (1)   1,197   41.3   1,198   43.3
Gross profit 1,701 58.7 1,571 56.7
 
Selling, general and administrative expenses (1) 907 31.3 861 31.1
Research and development expenses 144 5.0 119 4.3
Restructuring charges, net 14 0.5 53 1.9
Shareholder settlement income   -   -   (11 ) (0.4 )
Operating income 636 21.9 549 19.8
 
Interest expense (51 ) (1.8 ) (52 ) (1.9 )
Interest income 6 0.2 5 0.2
Other income   2   0.1   13   0.5
Income from continuing operations before income taxes 593 20.5 515 18.6
 
Income tax expense   99   3.4   83   3.0
Income from continuing operations 494 17.0 432 15.6
 
Loss from discontinued operations, net of income taxes   -   -   (5 ) (0.2 )
Net income $ 494   17.0 $ 427   15.4
 
Basic earnings per share:
Income from continuing operations $ 1.02 $ 0.87
Loss from discontinued operations - (0.01 )
Net income 1.02 0.86
 
Diluted earnings per share:
Income from continuing operations $ 1.02 $ 0.87
Loss from discontinued operations - (0.01 )
Net income 1.02 0.86
 
Weighted-average number of shares outstanding (in millions):
Basic 483 495
Diluted 486 498
 
 
 
 

(1) Amortization expense of intangible assets is included in the following income statement captions:

Cost of goods sold $ 39 $ 37
Selling, general and administrative expenses   12     12  
$ 51   $ 49  
             
 
Covidien plc
Non-GAAP Reconciliations
Quarters Ended December 30, 2011 and December 24, 2010
(dollars in millions, except per share data)
 
Quarter Ended December 30, 2011
Sales Gross profit

Gross margin
percent

Operating
income

Operating margin
percent

Income from
continuing
operations before
income taxes

Income from
continuing
operations

Diluted earnings
per share from
continuing
operations

 
GAAP $ 2,898 $ 1,701 58.7 % $ 636 21.9 % $ 593 $ 494 $ 1.02
Adjustments:
Restructuring and related charges, net (1) - 4 18 18 14 0.03
Legal charges(2) - - 47 47 35 0.07
Separation costs (3)   -   -   4     4     4   0.01
As adjusted $ 2,898 $ 1,705 58.8 $ 705   24.3 $ 662   $ 547   1.13
 
 
 
Quarter Ended December 24, 2010
Sales Gross profit

Gross margin
percent

Operating
income

Operating margin
percent

Income from
continuing
operations before
income taxes

Income from
continuing
operations

Diluted earnings
per share from
continuing
operations

 
GAAP $ 2,769 $ 1,571 56.7 % $ 549 19.8 % $ 515 $ 432 $ 0.87
Adjustments:
Inventory charges (4) - 24 24 24 15 0.03
Restructuring charges - - 53 53 38 0.08
Shareholder settlement income (5)   -   -   (11 )   (11 )   (11 ) (0.02 )
As adjusted $ 2,769 $ 1,595 57.6 $ 615   22.2 $ 581   $ 474   0.95
 
 
 
(1) Amount includes accelerated depreciation, which is included in cost of goods sold.
 
(2) Related to our indemnification obligations for certain claims pertaining to all known pending and estimated future pelvic mesh product liability cases, which is included in selling, general and administrative expenses.
 
(3) Represents the costs related to the separation of our Pharmaceuticals segment.
 
(4) Represents charges in cost of goods sold related to ev3 inventory that had been written up to fair value upon acquisition.
 
(5) Represents income related to the reversal of our portion of the remaining reserves for shareholder settlements, which have all been resolved.
                           
 
Covidien plc
Segment and Geographical Sales
Quarters Ended December 30, 2011 and December 24, 2010
(dollars in millions)
 
Quarters Ended

December 30,
2011

December 24,
2010

Percent change

Currency
impact

Operational
growth (1)

 
Medical Devices
United States $ 895 $ 849 5 % - % 5 %
Non-U.S.   1,089   1,028 6 1 5
$ 1,984 $ 1,877 6 1 5
 
Pharmaceuticals
United States $ 323 $ 308 5 % - % 5 %
Non-U.S.   167   162 3 (1 ) 4
$ 490 $ 470 4 (1 ) 5
 
Medical Supplies
United States $ 375 $ 370 1 % - % 1 %
Non-U.S.   49   52 (6 ) (2 ) (4 )
$ 424 $ 422 - (1 ) 1
 
Covidien plc
United States $ 1,593 $ 1,527 4 % - % 4 %
Non-U.S.   1,305   1,242 5 - 5
$ 2,898 $ 2,769 5 - 5

(1) Operational growth, a non-GAAP financial measure, measures the change in sales between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. See description of non-GAAP financial measures contained in this release.

 
 
Covidien plc
Select Product Line Sales
Quarters Ended December 30, 2011 and December 24, 2010
(dollars in millions)
                         
Quarters Ended

December 30,
2011

December 24,
2010

Percent
change

Currency
impact

Operational
growth (1)

 
Medical Devices
Endomechanical Instruments $ 581 $ 568 2 % - % 2 %
Soft Tissue Repair Products 218 221 (1

)

- (1 )
Energy Devices 321 270 19 - 19
Oximetry & Monitoring Products 207 205 1 - 1
Airway & Ventilation Products 181 186 (3

)

- (3 )
Vascular Products 387 332 17 1 16
 
Pharmaceuticals
Specialty Pharmaceuticals $ 134 $ 131 2 % - % 2 %
Active Pharmaceutical Ingredients 102 84 21 - 21
Contrast Products 145 143 1 (2 ) 3
Radiopharmaceuticals 109 112 (3

)

(1 ) (2 )

(1) Operational growth, a non-GAAP financial measure, measures the change in sales between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. See description of non-GAAP financial measures contained in this release.

Source: Covidien plc

Covidien
Eric Kraus, 508-261-8305
Senior Vice President
Corporate Communications
eric.kraus@covidien.com
or
Bruce Farmer, 508-452-4372
Vice President
Public Relations
bruce.farmer@covidien.com
or
Coleman Lannum, CFA, 508-452-4343
Vice President
Investor Relations
cole.lannum@covidien.com
or
Todd Carpenter, 508-452-4363
Director
Investor Relations
todd.carpenter@covidien.com